Investments An Introduction 9th Edition Mayo Test Bank

Investments An Introduction 9th Edition
Mayo Test Bank

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Chapter 8—Closed-end Investment Companies
TRUE/FALSE
1. A closed-end investment company is not a "mutual fund."
ANS: T PTS: 1
NAT: AACSB: Reflective thinking | understanding investments
2. The net asset value of the shares in a closed-end investment company depends on the difference
between the fund's assets and liabilities and the number of shares outstanding.
ANS: T PTS: 1
NAT: AACSB: Analytic skills | understanding investments
3. If a closed-end investment company were liquidated, the investor should receive the net asset value
minus the cost of the liquidation.
ANS: T PTS: 1
4. A closed-end investment company has a variable capital structure.
ANS: F PTS: 1
5. The shares of a closed-end investment company often sell for discount.
ANS: T PTS: 1
6. The discount paid for the shares of a closed-end investment company is fixed by the firm.
ANS: F PTS: 1
7. The only costs of investing in a closed-end investment company are the commissions to buy and sell
the shares.
ANS: F PTS: 1
8. Distributions from an investment company may include earnings and capital gains.
ANS: T PTS: 1
9. Distributions from a closed-end investment are subject to federal income taxation.
ANS: T PTS: 1
10. A unit trust is a passive investment that holds a fixed portfolio of securities such as federal government
bonds.
ANS: T PTS: 1
11. Many unit trusts are self-liquidating.
ANS: T PTS: 1
12. A loading fee charged by a mutual fund does not apply to a closed-end investment company.
ANS: T PTS: 1
13. If a closed-end investment company specializes in the securities of one sector of the economy,
systematic risk is reduced.
ANS: F PTS: 1
NAT: AACSB: Reflective thinking | understanding risk and return
14. The first exchange-traded funds were a type of index fund.
ANS: T PTS: 1
15. ETFs issue new shares when an investor buys the stock.
ANS: F PTS: 1
16. As a result of arbitrage, ETFs tend to sell for their net asset value.
ANS: T PTS: 1
17. An investor may not sell short the shares of an ETF.
ANS: F PTS: 1
18. Compared to selecting individual stocks, ETFs ease the process of constructing a well-diversified
portfolio.
ANS: T PTS: 1
19. If an investor believes that financial markets are inefficient, this argues for the individual to pursue a
more active portfolio strategy and purchase exchange-traded funds.
ANS: F PTS: 1
20. Asset allocation is important to help diversify a portfolio, but the allocation has little impact on the
portfolio's return.
ANS: F PTS: 1
NAT: AACSB: Analytic skills | understanding risk and return
21. Asset allocation determines the proportion of a portfolio that should be invested in various classes of
assets.
ANS: F PTS: 1
22. The return a portfolio earns is affected by the allocation of the portfolio's assets.
ANS: T PTS: 1
MULTIPLE CHOICE
1. Closed-end investment companies

1. have a fixed capital structure
2. issue new stock whenever an individual buys shares
3. may sell for a premium over net asset value
4. must sell for their net asset value
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
ANS: A PTS: 1
2. The net asset value of a closed-end investment company fund increases with
a. higher stock prices
b. lower stock prices
c. larger number of shares
d. increased liabilities
ANS: A PTS: 1
3. Since closed-end investment companies acquire securities in efficient financial markets, they
a. cannot outperform the market consistently
b. should not outperform the market consistently
c. will underperform the market when security prices decline
d. primarily bear unsystematic risk
ANS: B PTS: 1
4. Closed-end investment companies with beta coefficients less than 1.0

a. have outperformed the market
b. have underperformed the market
c. have more systematic risk than the market
d. have less systematic risk than the market
ANS: D PTS: 1
5. If a closed-end investment company is selling for a discount

a. its price exceeds the net asset value
b. its price is less than the net asset value
c. dividend income exceeds capital gains
d. capital gains exceed dividend income
ANS: B PTS: 1
6. Exchange-traded funds
a. redeem their shares
b. only buy exchangeable securities
c. are bought and sold in secondary markets
d. cannot be sold short
ANS: C PTS: 1
7. Exchange-traded funds
a. consistently outperform other funds
b. mimic an index of securities
c. require investors to select individual stocks
d. are illustrations of load funds
ANS: B PTS: 1
8. Many exchange-traded funds limit their portfolios to

a. high-quality securities
b. stocks that respond to changes in the Consumer Price Index
c. stocks included in an aggregate measure of stock prices
d. stocks and bonds of companies in a particular industry
ANS: C PTS: 1
9. Asset allocation affects the investor's return by

a. altering the returns on individual assets
b. weighting the portfolio returns by the allocation
c. assuring diversification
d. increasing the investor's use of mutual funds
ANS: B PTS: 1
10. Asset allocation determines

1. the proportion of a portfolio that should be held in money market securities
2. the distribution of a portfolio between stocks and bonds
3. the allocation of a portfolio among classes of stock
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all three
ANS: D PTS: 1
11. Asset allocation policy

1. has little impact on a portfolio's return
2. assures portfolio diversification
3. increases the costs associated with investing
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. none of the above
ANS: D PTS: 1
PROBLEM
1. If an investor purchases shares in a no-load fund for $36, receives cash distributions of $1, and
redeems the shares after one year for $42, what is the percentage return on the investment?
ANS:
The percentage return: ($42 − 36 + 1)/$36 = 16.67%
PTS: 1 NAT: AACSB: Analytic skills | understanding risk and return
2. The net asset value of shares in a closed-end investment company is $36. An investor buys the shares
for $34 in the secondary market. The company distributes $1, and after one year, the net asset rises to
$42. The investor sells the shares for $44 in the secondary market.
a. What is the discount?
b. What is the percentage return on the investment?
ANS:
a. The discount is $36 − $34 = $2 (5.9% of NAV).
b. The percentage return: ($44 − 34 + 1)/$34 = 32.3%
PTS: 1 NAT: AACSB: Analytic skills | understanding risk and return

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Investments An Introduction 9th Edition

Mayo Test Bank

1. A closed-end investment company is not a "mutual fund."

4. A closed-end investment company has a variable capital structure.

5. The shares of a closed-end investment company often sell for discount.

9. Distributions from a closed-end investment are subject to federal income taxation.

11. Many unit trusts are self-liquidating.

14. The first exchange-traded funds were a type of index fund.

17. An investor may not sell short the shares of an ETF.

1. Closed-end investment companies

4. Closed-end investment companies with beta coefficients less than 1.0

5. If a closed-end investment company is selling for a discount

8. Many exchange-traded funds limit their portfolios to

9. Asset allocation affects the investor's return by

10. Asset allocation determines

11. Asset allocation policy

PTS: 1 NAT: AACSB: Analytic skills | understanding risk and return

a. What is the discount?

b. What is the percentage return on the investment?

a. The discount is $36 − $34 = $2 (5.9% of NAV).

b. The percentage return: ($44 − 34 + 1)/$34 = 32.3%

PTS: 1 NAT: AACSB: Analytic skills | understanding risk and return

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